Why I sold my High Appreciation Seattle Rentals: Return on Equity

Podcast Version

Wait I thought Seattle was a hot market with double digit appreciation and an up and coming tech market?!?

There are many metrics that Investors use to quantify the quality of their investments. NOI, ROI, IRR, are to name a few. After purchasing a couple rentals in the Seattle market and being the beneficiary of some nice appreciation, I evaluated the property’s performance with a ROE or Return of Equity metric. On of my rentals had appreciated all the way to $450k and my mortgage that I owned was $200k. Therefore, I had about 250K of “lazy” equity. If you kids are at home with you calculators that 250k goes in the denominator of the calculation. The numerator is the annual cash flow which was about $4K a year. Therefore my return on equity was less than 2%=4k/250k. Frankly, 2% is very poor compared to stocks (~8-10%) or properly leveraged Real Estate (~20-40%).

Video: If your interested in seeing a A-Grade rental in Seattle that does not cashflow (poor cashflow investment)

I am sure someone somewhere is trying to invest in something similar and fooling themselves that they are making money on the project. But you are smart and you subscribe via RSS feed to this blog and podcast 😉

Long story short, I decided to sell these rentals to unleash this “lazy money” and get it working again with prudent leverage. This is what separates sophisticated investors who look at the numbers and your mom & pop investors who go by warm & fuzzy feelings of “hey I’m making cashflow, life is good”. Yes, Mom you are cashflowing but that is because you are halfway to 100% cash in the deal and you are taking on all that hassle and risk for a microscopic return.

ROI vs T
ROI vs T w releveraged
A couple graphs for the engineers.

SPC GET ‘ER DONE PLAN:

  1. Arrange all your properties on a spreadsheet and calculate ROE, Cash on Cash Return, etc.
  2. Look for the “Lazy Money” to trade in for a better performing investment.

Original BiggerPockets post

Save

Save

2 Comments

  1. Jan
    November 03, 2016

    Nice! My buddy was just telling me about ROE, and how it gets worse over time, but I couldn’t really picture it. Your graphs helped. Thanks.

    Reply
    1. Lane
      November 03, 2016

      Lol I was just editing Patricks podcast #30 and he said I told him to sell his 4 unit and go big too.

      Reply

Leave a Reply

Your email address will not be published. Required fields are marked *